Practice Unit issued for UNICAP method changes

Tax Hot Topics newsletterThe IRS Large Business and International (LB&I) division recently issued a Practice Unit for IRS-imposed changes in accounting method that focuses on Uniform Capitalization (UNICAP) accounting method changes under Section 263A and computation of the associated Section 481(a) adjustment.

The Practice Unit provides an overview of tax accounting method principles and the procedures for IRS-imposed changes in accounting method, including:
  • Items that constitute a method of accounting
  • The general rule that Section 263A accounting method changes are deemed to occur before concurrently filed changes in method of accounting (Treas. Reg. Sec. 1.263A-7(b))
  • The IRS requirement to provide specific written notification of changes in accounting method to a taxpayer
  • Examples of proper computation of the adjustment

There are no surprises included in the directive and the guidance is consistent with our interpretation of IRS-imposed and taxpayer-initiated accounting method changes. However, one item included in the practice unit that is of particular interest relates to the example provided for computing an adjustment for LIFO taxpayers using the Three-Year Average Method for calculating the revaluation factor.

The example computes the revaluation factor based on the three-year average of the percentage change in Section 263A costs between the old method and the new method instead of the percentage change in total combined current costs of inventory for the three-year period. This example is not only in direct contrast to the IRS National Office’s position (as published in TAM 20111014) but is also inconsistent with the method implemented. In practice, the revaluation factor has been computed using the weighted average for the three years, which results in a more precise factor. It is unclear why the example is not aligned with the IRS National Office’s position and the inconsistency raises some questions about whether we may see future guidance that clarifies or changes the current technical position.

Sharon Kay
Partner, Washington National Tax Office
T +1 202 861 4140

Caleb Cordonnier
Manager, Washington National Tax Office
T +1 202 521 1555

Dennis St. Martin
Manager, Washington National Tax Office
T +1 202 521 1562

Jason Seo
Senior Associate, Washington National Tax Office
T+1 202 521 1556